Exam

Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1
In a flexible exchange rate regime, an increase in the foreign interest rate (i*) will cause:

1)

_______
A)
a movement along the IP curve.
B)
neither a shift nor movement along the IP curve.
C)
the IP curve to shift to the right/down.
D)
the IP curve to shift to the left/up.

2
For this question, assume that the economy is operating in a fixed exchange rate regime and that perfect capital mobility
exists. Given this information, which of the following will occur?

2)

_______
A)
The central bank cannot use monetary policy to affect domestic output.
B)
An expansionary fiscal policy will require that the central bank increase the money supply.
C)
The domestic and foreign interest rates must be equal.
D)
all of the above
E)
none of the above

3
Assume the interest parity condition holds and that initially i = i*. A reduction in the foreign interest rate (i*) will cause:

3)

_______
A)
an expected depreciation of the domestic currency.
B)
an increase in E.
C)
an increase in the demand for the domestic currency.
 D)
all of the above

4
Assume that the interest parity condition holds. Also assume that the U.S. interest rate is 6% while the U.K. interest rate is
8%. Given this information, financial markets expect the pound to:

4)

_______
A)
appreciate by 6%.
B)
appreciate by 2%.
C)
depreciate by 14%.
D)
depreciate by 2%.
E)
appreciate by 4%.

5
An individual will be indifferent between holding foreign or domestic bonds when which of the following conditions
holds?

5)

_______
A)
the Marshall-Lerner condition holds
B)
the expected rate of depreciation of the domestic currency is zero
C)
the foreign and domestic interest rates are equal
D)
none of the above

6
In an open economy under flexible exchange rates, a reduction in the money supply will always cause:

6)

_______
A)
an increase in the exchange rate, E.
B)
an increase in the interest rate.
C)
a reduction in output.
D)
all of the above
E)
only A and B

7
Assume policy makers in a fixed exchange rate regime decide to peg the exchange rate at a lower level. This is called:

7)

_______
A)
a revaluation.

B)

a depreciation.
C)
a devaluation.

D)

an appreciation.

8
In the early 1990s, European unemployment rose largely because of:

8)

_______
A)
high inflation.
B)
reductions in stock prices.
C)
undervalued currencies.
D)
overvalued currencies.
E)
none of the above

9
An increase in the money supply in a flexible exchange rate regime will cause:
9)

_______
A)
a depreciation of the domestic currency.

B)

no change in E.
C)
an increase in E.

D)

a shift of the IP curve.

1
Suppose policy makers are pursuing a policy to fix the exchange rate. In such a system with perfect capital mobility, an
open market sale of domestic bonds by the domestic central bank will eventually result in:

10)

______
A)
a permanent reduction in the monetary base.
B)
a gradual reduction in the domestic interest rate.
C)
a permanent increase in the monetary base.
D)
a change in the composition of the monetary base.

1
Under a fixed exchange rate regime, the central bank must act to keep:

11)

______
A)
E = 1.
B)
P = P*.
C)
the real exchange rate fixed.
D)
i = i*.
 E)
none of the above

1
Under a fixed exchange rate regime, we know that a tax increase will cause which of the following?

12)

______
A)
an increase in investment

B)

an increase in net exports

C)
an increase in imports

D)

all of the above

1
The European Monetary System represented a(n):

13)

______
A)
crawling peg.

B)

a flexible exchange rate regime.

C)
exchange rate regime with "bands."

D)

none of the above

1
Suppose a country is pursuing a fixed exchange rate regime with imperfect capital mobility. The ability of that country to
move its domestic interest rate while maintaining its exchange rate will depend on:

14)
______
A)
the degree of development of its financial markets.
B)
the amount of foreign exchange it holds.
C)
the degree of capital controls.
D)
all of the above
E)
both A and B

1
A common argument for fixed exchange rates is that they:

15)

______
A)
make trade more costly, and thus encourage domestic citizens to buy domestically produced output.
B)
forever free the central bank from have to adjust the exchange rate to fundamental changes in the economy.
C)
give central banks greater freedom in adjusting their economy's level of output.
D)
all of the above
E)
none of the above

1
For this question, assume that there is a simultaneous increase in government spending and monetary contraction. In a
flexible exchange rate regime, we know with certainty that such a policy mix will cause which of the following?

16)

______
A)
a reduction in net exports
B)
an increase in the exchange rate
C)
an increase in the domestic interest rate
D)
all of the above
E)
only A and C
 1
In an open economy under flexible exchange rates, an increase in the interest rate will cause an increase in which of the
following?

17)

______
A)
the exchange rate, E
B)
net exports
C)
investment
D)
all of the above
E)
none of the above

1
Assume policy makers in a fixed exchange rate regime decide to peg the exchange rate at a higher level. This is called:

18)

______
A)
a revaluation.

B)

a devaluation.
C)
a depreciation.

D)

an appreciation.

1
Suppose policy makers are pursuing a policy to fix the exchange rate. In such a system with perfect capital mobility, an
open market purchase of domestic bonds by the domestic central bank will eventually result in:

19)

______
A)
a permanent increase in the monetary base.
B)
a change in the composition of the monetary base.
C)
a gradual reduction in the domestic interest rate.
D)
a permanent reduction in the monetary base.

20)
Assume that the current exchange rate between U.K. pound and the U.S. dollar is 2 (E = 2.0). If interest parity holds, and
the U.S. interest rate is 6% while the U.K. interest rate is 8%, the expected exchange rate in one year is:

20)

______
A)
1.98.

B)

1.99.

C)

2.01.

D)

2.02.

E)

2.04.

2
In a flexible exchange rate regime, a reduction in the foreign interest rate (i*) will cause:

21)

______
A)
the IP curve to shift to the right/down.
B)
a movement along the IP curve.
C)
neither a shift nor movement along the IP curve.
D)
the IP curve to shift to the left/up.

2
Suppose a country with a fixed exchange rate decides to reduce the price of its currency. This change in policy is called:

22)

______
 A)
a peg.
B)
a devaluation.
C)
a depreciation.
D)
an appreciation.
E)
a revaluation.

2
The exchange rate policy of the United States is:

23)

______
A)
a crawling peg.
B)
the EMS.
C)
a float.
D)
a fixed rate within a band.
E)
none of the above

2
In a flexible exchange rate regime, a reduction in the expected future exchange rate will cause:

24)

______
A)
the IP curve to shift to the right/down.
B)
the IP curve to shift to the left/up.
C)
neither a shift nor movement along the IP curve.
D)
a movement along the IP curve.

2
For this question, assume that there is a simultaneous tax cut and monetary contraction. In a flexible exchange rate
regime, we know with certainty that:
25)

______
A)
the exchange rate would increase and output would decrease.
B)
the exchange rate and output would both increase.
C)
the exchange rate would decrease and output would increase.
D)
the exchange rate would increase.
E)
none of the above

2
In practice, under the EMS, a member country:

26)

______
A)
could change its interest rate only if other countries changed theirs as well.
B)
could never change its interest rate.
C)
had complete freedom in choosing the interest rate it wanted.
D)
had complete freedom in choosing its interest rate only if it is a very small country.
E)
must apply to a special European Commission in order to change its interest rate.

2
Assume that the interest parity holds and that the dollar is expected to appreciate against the pound. Given this
information, we know that:

27)

______
A)
individuals will prefer to hold U.S. bonds because the U.S. interest rate exceeds the U.K. interest rate.
B)
U.S. and U.K. interest rates are equal.
C)
the U.K. interest rate exceeds the U.S. interest rate.
D)
the U.S. interest rate exceeds the U.K. interest rate.
 E)
none of the above

2
Under a fixed exchange rate regime, we know that an increase in stock market wealth that increases consumption will
cause:

28)

______
A)
an increase in imports.
B)
an increase in investment.
C)
a reduction in net exports.
D)
all of the above
E)
none of the above

2
In the early 1990s, which nation took the lead in driving up European interest rates?

29)

______
A)
France
B)
England
C)
Spain
D)
Germany
E)
none of the above

3
Suppose there is a reduction in the real exchange rate. Which of the following will occur as a result of this change in the
real exchange rate?

30)

______
A)
a decrease in government spending
B)
an increase in imports
C)
an increase in net exports
D)
a reduction in output
E)
all of the above

1)

2)
D

3)
A

4)
D

5)
A

6)
D

7)
A

8)
B

9)
A

10)
D
 11)
B

12)
B

13)
C

14)
D

15)
E

16)
D

17)
D

18)
B

19)
B

20)
C

21)
D

22)
E

23)
C

24)
B

25)
D

26)
A

27)
D

28)
D

29)
E

30)
C